Elegant Decor Company's management is trying to decide whether to eliminate Department 200, which has produced losses or low profits for several years. The company's departmental Income statements show the following. Dept. 200 $283,880 210,000 73,000 Combined $ 719,eee 478,000 241,000 ELEGANT DECOR COMPANY Departmental Income Statements For Year Ended December 31, 2019 Dept. lee Sales $436,000 Cost of goods sold 268, eee Gross profit 168, ce Operating expenses Direct expenses Advertising 17,500 Store supplies used 4, eee Depreciation-store equipment 4,60 Total direct expenses 26, 10e Allocated expenses Sales salaries 65, eee Rent expense 9,470 Bad debts expense 9,7ee Office salary 21,840 Insurance expense 2,500 Miscellaneous office expenses 2,100 Total allocated expenses 119,610 Total expenses 136, 710 Net income (loss) $ 31,290 14,000 3,500 3,eee 20,500 31,5ee 7,500 7,6ee 46,600 39, eee 4,770 7,800 14,560 1,700 1,400 69,230 89, 730 $(16,730) 194,000 14,240 17,5ee 36,400 4,200 3,5ee 179,840 226,440 $ 14,560 In analyzing whether to eliminate Department 200, management considers the following: a. The company has one office worker who earns $700 per week, or $36,400 per year, and four salesclerks who each earns $500 per week, or $26,000 per year for each salesclerk. b. The full salaries of two salesclerks are charged to Department 100. The full salary of one salesclerk is charged to Department 200. The salary of the fourth clerk, who works half-time in both departments, is divided evenly between the two departments. . c. Eliminating Department 200 would avoid the sales salaries and the office salary currently allocated to it. However, management prefers another plan. Two salesclerks have indicated that they will be quitting soon Management believes that their work can be done by the other two clerks if the one office worker works in sales half-time. Eliminating Department 200 will allow this shift of duties. If this change is Implemented, half the office worker's salary would be reported as sales salaries and half would be reported as office salary. d. The store building is rented under a long-term lease that cannot be changed. Therefore, Department 100 will use the space and equipment currently used by Department 200. e. Closing Department 200 will eliminate its expenses for advertising, bad debts, and store supplies: 66% of the insurance expense allocated to it to cover its merchandise Inventory, and 17% of the miscellaneous office expenses presently allocated to it. 2. Prepare a forecasted annual Income statement for the company reflecting the elimination of Department 200 assuming that it will not affect Department 100's sales and gross profit. The statement should reflect the reassignment of the office worker to one-halftim as a salesclerk. ELEGANT DECOR COMPANY Forecasted Annual Income Statement Under Plan to Eliminate Department 200 0 Operating expenses Total operating expenses 0 $ 0
